What Is Proprietary Trading & What Are Its Advantages?

Proprietary trading refers to companies that employ other profitable traders for their own trading via funded trading accounts.

The company's equity is used to generate profits. In this model, the trader and the company benefit simultaneously through profit splits. In this article, we will explore the benefits of prop trading and provide important information for aspiring prop traders.

Basics of Proprietary Trading

Proprietary trading is the trading of financial instruments such as stocks, bonds, forex, and derivatives, in which a trader uses a company's capital to make profits. In other words, the prop trader is not trading with his own money but with the money of his employer — a proprietary trading firm or a bank.

The prop trader plays a crucial role in his company's trading room. He analyzes markets, develops trading strategies, places trading orders, and monitors ongoing positions. The goal is to make profits while minimizing risk.

If a prop trader works for a proprietary trading firm or a bank, he or she will subsequently share in the profits when positive returns are achieved. The same model is applied to online prop trading platforms. 

How Does Proprietary Trading Work?

Prop trading firms hire traders to make trades using the firm’s capital. The profits are then shared between the trader and the firm based on a pre-agreed percentage. Traders do not use their own money, which can minimize personal financial risk but requires exceptional skill and performance to retain profitability. 

Some firms require traders to deposit or contribute risk, allowing them to leverage the firm’s capital for much larger trades than they could execute independently.

A key aspect of prop trading is the ability to employ high leverage, which allows traders to control large positions with relatively small amounts of capital. This can magnify both gains and losses, so risk management techniques such as stop-loss orders, hedging, and position sizing are essential to protect the firm’s capital​.

The Modern Approach To Prop Trading

Prop trading firms always look for skilled prop traders and often serve as incubators for financial innovation and talent development. Online proprietary trading platforms are the result of this demand. On these platforms, traders access the firm’s capital and execute the trades remotely. Traders are provided with advanced online tools to perform market analysis, and even automate strategies like algorithmic trading.

Provided they meet performance goals, remote prop traders can manage their own schedules. It is an interesting career option offering flexibility, access to advanced trading technologies, and decent profits for a talented trader. Successful traders can earn big bucks with prop trading while benefiting from free resources and training programs of the trading platform.

Benefits of Proprietary Trading for Traders

• Access to Advanced Tools and Resources: Prop traders have access to state-of-the-art platforms and analytics. They can use advanced technologies such as real-time data, market analysis tools, and high-frequency trading algorithms, all of which can greatly enhance their performance.

• Higher Leverage: Prop traders can access greater leverage than they would with personal funds. This way, they can take larger positions and potentially realize higher profits. A small capital contribution by a trader can give them access to several times that amount through the firm.

• Reduced Personal Risk: Since traders use the firm’s capital rather than their own, they avoid the risk of losing their wealth. However, many firms require a "risk contribution" from traders to ensure they have some personal stake in the trades, which keeps them accountable.

• Profit-Sharing Model: Prop traders receive a percentage of the profits they generate. This model can be highly rewarding for successful traders.

• Educational and Training Opportunities: Proprietary trading firms invest in their traders by offering training, mentorship, and access to experienced professionals to improve their long-term profitability.

Benefits for Companies

• Potential for High Profits: Prop trading allows firms to maximize their returns by speculating in various financial markets, such as equities, commodities, and derivatives. Since they trade their own funds, they don’t work on a commission basis leading to higher revenue if trades are successful.

• Market Liquidity: Prop firms provide liquidity to the markets by actively trading, which contributes to market stability in return.

• Flexibility and Agility: Prop trading firms do not need client approval to execute trades. This allows them to quickly adjust their strategies and take advantage of short-term market opportunities, such as arbitrage or trend following.

Who Can Become a Prop Trader?

In principle, any company or person can become a prop trader, provided they have the necessary qualifications and expertise and comply with the legal framework. You can trade with your company's capital, register a business for prop trading, or offer your services as part of a trading company. This means you make your strategic and analytical skills available to special prop trader providers.

If you would like to gain experience first, OANDA Prop Trader offers you a unique opportunity through its Prop Trader Challenge. OANDA's challenge allows you to put your trading skills to the test. Here you won't bear the risk of losing your capital because you will be trading with virtual accounts and simulated financial instruments.

Once you complete this challenge, you will have the right to own a prop trader account on the platform. Do you have what it takes to be a successful trader? If you prove it by making a profit, then OANDA will give you your challenge fee back along with your first payout. 

You can choose from multiple tiers in this challenge, with different virtual capital amounts and entry fees. Based on your budget and experience, you can pay as little as a $60 entry fee for the 10k Challenge, and up to $2,400 for the $500,000 Black Challenge.

Is Proprietary Trading Right for You?

Proprietary trading offers a unique opportunity for traders to leverage a firm’s capital, benefit from advanced tools, and earn substantial profits through a profit-sharing model. However, success requires solid training, a clear strategy, disciplined risk management, and the ability to work under pressure. Those who have a thorough knowledge of the financial markets and are ready for new trading strategies can be very successful in this field.